Standard Costing and Performance Measures For Today's Manufacturing Environment

CHAPTER 10
Standard Costing and Performance Measures for

Todays Manufacturing Environment
ANSWERS TO REVIEW QUESTIONS

10-1 Management by exception is a managerial technique in which only significant
deviations from expected performance are investigated.
10-2 Any control system has three basic parts: a predetermined or standard
performance level, a measure of actual performance, and a comparison between
standard and actual performance. The system works by making the comparison
between actual and standard performance and then taking action to bring about a
desired consequence.
10-3 One method of setting standards is the analysis of historical data. Historical cost
data provide an indicator of future costs. The methods for analyzing cost behavior
described in Chapter 7 are used to predict future costs on the basis of historical
costs. These predictions then form the basis for setting standards. Another
method for setting standards is task analysis, which is the analysis of a production
process to determine what it should cost to produce a product or service. The
emphasis shifts from what the product did cost in the past to what it should cost in
the future. An example of task analysis is a time-and-motion study conducted to
determine how long each step performed by direct laborers should require.
10-4 A perfection (or ideal) standard is the cost expected under perfect or ideal
operating conditions. A practical (or attainable) standard is the cost expected
under normal operating conditions. Many behavioral scientists question the
effectiveness of perfection standards. They feel that employees are more likely to
perform well when they strive to achieve an attainable standard than when they
strive, often unsuccessfully, to achieve a perfection standard.
10-5 A bank could use standards to specify the required amount of time to process a
loan application or process a bank transaction.
10-6 Standard material prices include the purchase price of the material and any
transportation costs incurred to obtain the material. The standard quantity of
material is the amount required to be included in the finished product plus an
allowance for normal waste expected in the production process.
McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,

Inc.
Managerial Accounting, 5/e 10- 1
10-7 An unfavorable direct-material price variance means that a higher price was paid
for the material than was expected when the standard was set. A favorable
variance has the opposite interpretation.
10-8 The manager in the best position to influence the direct-material price variance is
the purchasing manager.
10-9 An unfavorable direct-material quantity variance means that a larger amount of

material was used in the production process than should have been used in
accordance with the standard. A favorable variance has the opposite
interpretation.
10-10 The manager in the best position to influence the direct-material quantity variance
usually is the production manager.
10-11 The direct-material price variance is based on the quantity purchased (PQ).
Deviations between the actual and standard price, which are highlighted by the
price variance, relate to the purchasing function in the firm. Timely action to follow
up a significant price variance is facilitated by calculating this variance as soon as
possible after the material is purchased.
The direct-material quantity variance is based on the amount of material used

in production (AQ). The quantity variance highlights deviations between the
quantity of material actually used (AQ) and the standard quantity allowed (SQ).
Therefore, it makes sense to compute this variance at the time the material is
used in production.
10-12 An unfavorable direct-labor rate variance means that a higher labor rate was paid
than was anticipated when the standard was set. One possible cause is that labor
rate raises granted were above those anticipated in setting the standards. Another
possible cause is that more highly skilled workers were used to perform tasks
than were required or were anticipated at the time the standards were set. A
favorable variance has the opposite interpretation.
10-13 In some cases, the manager in the best position to influence the direct-labor rate
variance is the production manager. In other cases, the personnel manager or
union negotiator would have greater influence.
10-14 The interpretation of an unfavorable direct-labor efficiency variance is that more

labor was used to accomplish a given task than was required in accordance with
the standards. A favorable variance has the opposite interpretation.
10-15 The manager in the best position to influence the direct-labor efficiency variance
usually is the production manager.

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10-2 Solutions Manual
10-16 The issue of quantity purchased versus quantity used does not arise in the
context of direct labor, because direct labor is purchased and used at the same
time. Unlike direct material, direct labor cannot be purchased and inventoried for
later use.
10-17 Several factors that managers often consider when determining the significance of
a variance are as follows: size of variance, extent to which the variances are
recurring, trends in the variances, controllability of the variances, and the
perceived costs and benefits of investigating the variances.
10-18 Several ways in which standard-costing should be adapted in the new

manufacturing environment are as follows:
(a) Reduced importance of labor standards and variances: As direct labor

occupies a diminished role in the new manufacturing environment, the
standards and variances used to control labor costs also decline in
importance.
(b) Emphasis on material and overhead costs: As labor diminishes in its

importance, material and overhead costs take on greater significance.
(c) Cost drivers: Identification of the factors that drive production costs takes on
greater importance in the cost management system.
(d) Shifting cost structure: Advanced manufacturing systems require large outlays
for production equipment, which entail a shift in the cost structure from
variable costs toward fixed costs. Overhead cost control becomes especially
critical.
(e) High quality and no defects: Total quality control programs that typically
accompany a JIT approach strive for very high quality levels for both raw
materials and finished products. One result should be very low material price
and quantity variances and low costs of rework.
(f) Non-value-added costs: A key objective of a cost management system is the

elimination of non-value-added costs. As these costs are reduced or
eliminated, standards must be revised frequently to provide accurate
benchmarks for cost control.
(g) New measures and standards: In the new manufacturing environment, new
measures must be developed to control key aspects of the production process.
As new measures are developed, standards should be established as
benchmarks for performance. An example is the manufacturing cycle efficiency
measure, which is defined as processing time divided by the sum of
processing time, inspection time, waiting time, and move time.
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(h) Real-time information systems: A computer-integrated manufacturing system
enables the managerial accountant to collect operating data as production
takes place and to report relevant performance measures to management on a
real-time basis. This enables managers to eliminate the causes of unfavorable
variances more quickly.
10-19 Under a standard-costing system, standard costs are used for product-costing
purposes as well as for control purposes. The costs entered into Work-in-Process
Inventory are standard costs. From that point forward, standard costs flow through
all the manufacturing accounts. When goods are finished, the standard cost of the
finished goods is removed from the Work-in-Process Inventory account and
transferred to the Finished-Goods Inventory account. When goods are sold, the
standard cost of the goods sold is transferred from the Finished-Goods Inventory
account to Cost of Goods Sold.
10-20 Advantages of a standard-costing system include the following:
(a) Standard costs provide a basis for sensible cost comparisons. Standard costs
enable the managerial accountant to compute the standard allowed cost, given
actual output, which then serves as a sensible benchmark to compare with the
actual cost incurred.
(b) Computation of standard costs and cost variances enables managers to

employ management by exception.
(c) Variances provide a means of performance evaluation and rewards for

employees.
(d) Since the variances are used in performance evaluation, they provide
motivation for employees to adhere to standards.
(e) Use of standard costs in product costing results in more stable product costs
than if actual production costs were used.
(f) A standard-costing system usually is less expensive than an actual- or normal-

costing system.
10-21 Seven areas in which operational performance measures are being used are as
follows:
(a) Raw material and scrap
(b) Inventory

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(c) Machinery
(d) Product quality
(e) Production and delivery
(f) Productivity
(g) Innovation and learning
10-22 Manufacturing cycle efficiency (MCE) is defined as processing time divided by the
sum of the following four items: processing time, inspection time, waiting time,
and move time.
10-23 Examples of customer-acceptance measures include the number of customer

complaints, the number of warranty claims, the number of products returned and
the cost of repairing returned products.
10-24 An aggregate productivity measure is defined as total output divided by total

input. Such a measure is limited because it is expressed in dollars, rather than in
physical attributes of the production process, and it is too highly aggregated. A
preferable approach to productivity measurement is to record multiple physical
measures that capture the most important determinants of a company's
productivity.
10-25 Eight criticisms of standard costing in an advanced manufacturing setting are the
following:
(a) Variances are too aggregate and too late to be useful.
(b) Variances are not tied to specific product lines, production batches, or FMS
cells.
(c) Standard-costing systems focus too much on direct labor.
(d) Frequent switching among products in an FMS cell makes cost standards
less appropriate.
(e) Shorter product life cycles mean that individual standards are soon outmoded.
(f) Traditional standard costs are not defined broadly enough to include important
costs, such as the total cost of ownership.
(g) Traditional standard-costing systems tend to focus too much on cost

minimization, rather than increasing product quality or customer service.

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(h) Automated manufacturing processes are highly reliable in meeting production
specifications. As a result variances from standards tend to be very small or
nonexistent.
10-26 Responses will vary widely on this question. Here are some possibilities for a
bank:
Financial: (a) profit; (b) cost of back-office (i.e., administrative) operations.
Internal operations: (a) number of transaction errors; (b) employee retention

and advancement.
Customer: (a) local market share; (b) number of repeat customers.
Innovation and learning: (a) new financial products; (b) employee suggestions
received and implemented.
10-27 An airline could measure the frequency and cost of customer complaints about
lost or damaged luggage. After reducing the number of such incidents, the cost
savings could be shared with the relevant employees (e.g., front-counter ticket
agents and baggage-handling personnel).

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SOLUTIONS TO EXERCISES
EXERCISE 10-28 (15 MINUTES)
Direct-material price variance = PQ(AP SP)

= 240,000($.81 $.80)
= $2,400 Unfavorable
Direct-material quantity = SP(AQ SQ)

variance
= $.80(210,000 200,000*)
* SQ = 200,000 kilograms = 50,000 units 4 kilograms per unit
Direct-labor rate variance = AH(AR SR)

= 13,000($16.30* $16.00)
* AR = $211,900 13,000 hours
Direct-labor efficiency variance = SR(AH SH)

= $16.00(13,000 12,500*)
* SH = 12,500 hours = 50,000 units .25 hours per unit

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DIRECT-MATERIAL PRICE AND QUANTITY VARIANCES
ACTUAL MATERIAL STANDARD MATERIAL

COST COST
Actual Actual Actual Standard Standard Standard
Quantity Price Quantity Price Quantity Price
240,000 $.81 240,000 $.80 200,000 $.80
kilograms per kilograms per kilograms per
purchased kilogram purchased kilogram allowed kilogram
$194,400 $192,000 $160,000
$2,400 Unfavorable
Direct-material 210,000 $.80
price variance kilograms per
used kilogram
$168,000
$8,000
Unfavorable
Direct-
material
quantity
variance

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EXERCISE 10-29 (CONTINUED)
DIRECT-LABOR RATE AND EFFICIENCY VARIANCES
ACTUAL LABOR COST STANDARD LABOR COST

Hours Rate Hours Rate Hours Rate
13,000 $16.30 13,000 $16.00 12,500 $16.00
hours per hours per hours per
used hour used hour allowed hour
$211,900 $208,000 $200,000
$3,900 Unfavorable $8,000 Unfavorable

Direct-labor Direct-labor
rate variance efficiency variance
$11,900 Unfavorable
Direct-labor variance
Answers will vary widely, depending on the company and the product. Typically, new
products present challenges in setting standards, particularly if they involve new
production processes or materials. Managerial accountants and engineers often
look to other similar products or other products manufactured using similar
processes to get an idea as to what the standard cost of a new product should be.
Standard quantity:
Hardwood in finished product...................................... 8 board feet
Allowance for normal scrap......................................... 2 board feet
Total standard quantity required per box..................... 10 board feet
Standard price:
Purchase price per board foot of hardwood................. $ 4.00
Transportation cost per board foot.............................. 1.50
Total standard price per board foot............................. $ 5.50

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Exercise 10-31 (continued)
Standard direct-material cost of a jewelry box:

Standard quantity....................................................... 10 board feet
Price per board foot................................................... $ 5.50
Standard direct-material cost...................................... $55.00
Direct-material price variance = PQ(AP SP)

= 6,000($7.30 $7.00)
Direct-material quantity variance = SP(AQ SQ)

= $7.00(4,200* 4,000 )
* AQ = 4,200 pounds = $30,660 $7.30 per pound
SQ = 4,000 pounds = 2,000 units 2 pounds per unit

= 6,450*($18.10 $18.00)
= $645 Unfavorable
* AH = 6,450 hours = $116,745 $18.10 per hour
Direct-labor efficiency variance = SR(AH SH)

= $18(6,450 6,000)*
* SH = 6,000 hours = 2,000 units 3 hours per unit

Inc.

COST COST
6,000 $7.30 6,000 $7.00 4,000 $7.00
pounds per pounds per pounds per
purchased pound purchased pound allowed pound
$43,800 $42,000 $28,000
$1,800 Unfavorable
Direct-material 4,200 $7.00
price variance pounds per
used pound
$29,400
$1,400
Unfavorable
Direct-
material
quantity
variance

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6,450 $18.10 6,450 $18.00 6,000 $18.00
$116,745 $116,100 $108,000
$645 Unfavorable $8,100 Unfavorable

$8,745 Unfavorable

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1. (a) Statistical control chart with variance data plotted:
Favorable variances
1 standard deviation
$1,000
$500

Time
0
January February March April May June
$500

$1,000

Unfavorable variances
(b) Only the variances in May and June would be investigated, since they are the
only ones that exceed 1 standard deviation, $950.

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2. Rule of thumb:
Standard cost................................................................................. $19,000

Cutoff percentage........................................................................... 6%
Cutoff value for investigation........................................................... $ 1,140
Only the June variance, $1,200 U, is equal to or greater than the cutoff value. Thus,
only June's variance would be investigated. (U denotes unfavorable.)
3. This is a judgment call, and there is no right or wrong answer. It would be

reasonable to conclude that the consistent stream of relatively large unfavorable
variances should be investigated before May. The three variances for February,
March, and April would be cause for concern.
Good output = (7/8) input = .875 input

Good output
= standard allowed input
.875
4,200pounds
= 4,800 pounds of input
.875
The standard allowed input quantity in May was 4,800 pounds.

Inc.
Direct Direct
Labor Material
Standard price or rate per unit of input...................... $20 per hr e $8 per lb
Standard quantity per unit of output.......................... 4 hrs per unit f 2.75 lbs per unit c
Actual quantity used per unit of output...................... 3.5 hrs 3 lbs per unit a
Actual price or rate per unit of input.......................... $21 per hr $7 per lb
Actual output........................................................... 10,000 units 10,000 units
Direct-material price variance................................... $30,000 F
Direct-material quantity variance.............................. $20,000 U b
Total of direct-material variances.............................. $10,000 F
Direct-labor rate variance......................................... $ 35,000 U d
Direct-labor efficiency variance................................. $100,000 F
Total of direct-labor variances................................... $ 65,000 F
Explanatory notes:
a. Direct-material price variance = PQ(AP SP)

$30,000 F = PQ ($7 $8)
PQ = 30,000 lbs
Actual quantity used = quantity purchased
AQ = PQ = 30,000 lbs
30,000lbs
Actual quantity per unit of output = 10,000units 3 lbs per unit
b. Total direct-material variance = price variance + quantity variance

$10,000 F = $30,000 F + quantity variance
Quantity variance = $20,000 U
c. Direct-material quantity variance = SP(AQ SQ)

$20,000 U = $8(30,000 SQ )
SQ = 27,500 lbs
27,500lbs
Standard quantity per unit = 10,000units 2.75 lbs per unit

Inc.
d. Total direct-labor variance = rate variance + efficiency variance

$65,000 F = rate variance + $100,000 F
Rate variance = $35,000 U
e. AH = 10,000 units 3.5 hrs per = 35,000 hrs

unit
$35,000 U = 35,000($21 SR )
SR = $20
f. Direct-labor efficiency variance = SR(AH SH)

$100,000 F = $20 (35,000 SH)
SH = 40,000 hrs
Standard hrs per unit = 40,000 hrs/10,000 units
= 4 hrs per unit

Inc.
1. processing time
Manufacturing cycle efficiency =
processing time inspection time
waiting time move time
8.5 hours
= 8.5 hours .5 hour .5 hour .5 hour
= 85%
2. total production time per batch

Manufacturing cycle time = units per batch
10 hours
= 20 units per batch
= .5 hour (or 30 minutes) per unit
units per batch

3. Velocity = total production time per batch
20 units
= 10 hours 2 units per hour
1. Manufacturing cycle efficiency (MCE):
processing time
MCE = processing time inspection time waiting time move time
3 days
3/22 13.6%(rounded)
= 3 days 1.5 days 15 days 2.5 days
2. Delivery cycle time is the average time between receipt of the customer's order
until delivery of the goods. In this case the delivery cycle time is 22 days.

Inc.
total output
1. Aggregate (or total) = total input
productivity
$10,000,00
0
1.25
= $8,000,000
2. This summary financial measure does not convey much information to management
or other users of the data. A preferable approach would be to record multiple
physical measures that capture the most important determinants of the bank's
productivity. Examples include the following:
a. Clerk time per bank window customer
b. Errors per 1,000 transactions handled
c. Checks miscoded per 1,000 checks processed
d. Customers per day
e. Customers per employee
f. Square feet of space in bank per 1,000 customers
g. Average time to process a loan application

Inc.
Raw-Material Inventory....................................................... 192,000

Direct-Material Price Variance.................................... 2,400
Accounts Payable...................................................... 194,400
Work-in-Process Inventory.................................................. 160,000

Direct-Material Quantity Variance........................................ 8,000
Raw-Material Inventory............................................... 168,000
Work-in-Process Inventory.................................................. 200,000

Direct-Labor Rate Variance................................................. 3,900
Direct-Labor Efficiency Variance......................................... 8,000
Wages Payable.......................................................... 211,900
Cost of Goods Sold............................................................ 22,300

Direct-Material Price Variance..................................... 2,400
Direct-Material Quantity Variance................................ 8,000
Direct-Labor Rate Variance......................................... 3,900
Direct-Labor Efficiency Variance................................. 8,000
Direct-Material
Raw-Material Inventory Price Variance
192,000 168,000 2,400 2,400
Direct-Material
Work-in-Process Inventory Quantity Variance
160,000 8,000 8,000
200,000
Direct-Labor
Accounts Payable Rate Variance
194,400 3,900 3,900
Direct-Labor
Wages Payable Efficiency Variance
211,900 8,000 8,000
Cost of Goods Sold

22,300

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SOLUTIONS TO PROBLEMS
PROBLEM 10-42 (35 MINUTES)
1. Schedule of standard production costs:
NEW JERSEY VALVE COMPANY

CAMDEN PLANT
SCHEDULE OF STANDARD PRODUCTION COSTS
BASED ON 7,800 UNITS
FOR THE MONTH OF JANUARY
Standard
Costs
Direct material............................................. 7,800 units 3 lbs. $2.50 $ 58,500
Direct labor.................................................. 7,800 units 5 hrs. 585,000
$15.00
Total standard production costs.................... $643,500
2. Variances:
a. Direct-material price = (PQ AP) (PQ SP)

variance
= (25,000 $2.60) (25,000 $2.50)
b. Direct-material quantity = (AQ SP) (SQ SP)

variance
= (23,100 $2.50) (23,400* $2.50)
= $750 Favorable
*7,800 units 3 lbs. per unit = 23,400 lb.
c. Direct-labor rate = (AH AR) (AH SR)

variance
= (40,100 $14.60) (40,100 $15.00)
= $16,040 Favorable
d. Direct-labor efficiency = (AH SR) (SH SR)

variance

Inc.
= (40,100 $15.00) (39,000* $15.00)
*7,800 units 5 hours per unit = 39,000 hr.

Standard
Direct Initial Unit Material
Material Mix Cost Cost
Nyclyn........................................................... 12 kg 1.45 real 17.40 real

Salex............................................................. 9.6 ltr 1.80 real 17.28 real

Protet............................................................ 5 kg 2.40 real 12.00 real

Standard material cost
for each 10-liter container............................ 46.68 real

The real is Brazils national currency .
1. Direct-material price = (PQ AP) (PQ SP)

variance
= (18,000 $1.38) (18,000 $1.35)
= $24,840 $24,300
= $540 Unfavorable
2. Direct-material quantity = (AQ SP) (SQ SP)

variance
= (9,500 $1.35) (10,000* $1.35)
= $675 Favorable
*500 units 20 yards per unit = 10,000 yards
3. Direct-labor rate = (AH AR) (AH SR)

variance
= (2,100 $9.15) (2,100 $9.00)
Inc.
= $19,215 $18,900
= $315 Unfavorable

Inc.
PROBLEM 10-44
(CONTINUED)
4. Direct-labor efficiency = (AH SR) (SH SR)

variance
= (2,100 $9.00) (2,000* $9.00)
= $18,900 $18,000
= $900 Unfavorable
*500 units 4 hours per unit = 2,000 hours
1. Type I fertilizer:
Price variance:
Actual quantity purchased x actual price
5,000 pounds x $ . $2,650
53
Actual quantity purchased x standard price
5,000 pounds x $ . 2,500
50
Direct-material price $ 150
variance. Unfavorable
Quantity variance:
Actual quantity used x standard price
3,700 pounds x $ . $1,850
50
Standard quantity allowed x standard price
4,400 pounds* x $ . 2,200
50..
Direct-material quantity $ 350 Favorable
variance
* 40 pounds x 55 clients x 2 applications
Type II fertilizer:
Price variance:
10,000 pounds x $ . $4,000
Inc.
40.
10,000 pounds x $ . 4,200
42.
Direct-material price $ 200 Favorable
variance.

Inc.
PROBLEM 10-45 (CONTINUED)
Quantity variance:
7,800 pounds x $ . $3,276
42
8,800 pounds* x $ . 3,696
42..
Direct-material quantity $ 420 Favorable
variance
* 40 pounds x 55 clients x 4 applications
2. Direct-labor variances:
Rate variance:
Actual hours used x actual rate
165 hours x $1,897.50
$11.50..
Actual hours used x standard rate
165 hours x 1,485.00
$9.00
Direct-labor rate $ 412.50
variance Unfavorable
Efficiency variance:
165 hours x $1,485.00
$9.00.
Standard hours allowed x standard
rate
220 hours* x 1,980.00
$9.00...
Direct-labor efficiency $ 495.00 Favorable
variance.
* 2/3 hours x 55 clients x 6 applications
3. Actual cost of applications:

Type I fertilizer:
Actual quantity used x actual price (3,700 pounds x $ .53) $1,961.0
. 0

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Type II fertilizer:
Actual quantity used x actual price (7,800 pounds x $ .40) 3,120.0
. 0
Direct labor:
Actual hours used x actual rate (165 hours x $11.50) 1,897.5
... 0
Total actual $6,978.5
cost. 0
Yes, the service was a financial success. Amato charged clients $40 per
application, generating revenue of $13,200 (55 clients x 6 applications x $40).
With costs of $6,978.50, the fertilization service produced a profit of $6,221.50.

Inc.
4. (a) Yes, the service was a success. Overall costs were controlled as indicated
by
a total favorable variance of $902.50. In addition, each of the three cost
components (Type I fertilizer, Type II fertilizer, and direct labor) produced a
net favorable variance. Amato did have a sizable unfavorable labor-rate
variance as a result of his having to pay $11.50 per hour when a more
typical wage rate would have been $9.00 per hour. This inflated rate is
attributable to the tight labor market, which is beyond his control. Note:
Part of the variance may have been caused by a standard rate that was set
too low, especially given the fact that this is a new service.
Type I fertilizer:
Price $150.00
variance.. Unfavorable
Quantity 350.00 Favorable
variance
Type II fertilizer:
Price 200.00 Favorable
variance..
Quantity 420.00 Favorable
variance
Direct labor:
Rate 412.50
Efficiency 495.00 Favorable
variance
Total material and labor variances $902.50 Favorable
(b) In this case, several of the favorable variances may have come back to
haunt Amato. The favorable labor efficiency variance means that less time
is being spent on the job than originally anticipated. This may indicate that
the part-time employee is rushing and doing sloppy work. Also, less
fertilizer used than budgeted (i.e., favorable quantity variances for both
Type I and Type II) would likely give rise to an increased occurrence of
weeds as well as a lack of greening in the lawn.
5. This is a management judgment for Amato to make. If the service is continued,

Amato should consider hiring a full-time employee and insisting on the standard
amount of fertilizer being applied to each lawn.

Inc.
1. No. The variances are favorable and small, with each being less than 2% of
budgeted cost amounts ($350,000). However, by simply reporting total variances
for material and labor, one cannot get a totally clear picture of performance.
Price, quantity, rate, and efficiency variances should be calculated for further
insight.

Inc.
2. Direct-material variances:
Price variance:
45,000 pounds x $346,500
$7.70.
45,000 pounds x 396,000
$8.80.
Direct-material price $ 49,500 Favorable
variance.
Quantity variance:
45,000 pounds x $396,000
$8.80
39,900 pounds* x 351,120
$8.80..
Direct-material quantity $ 44,880
* 9,500 units x 4.2 pounds
Total direct-material variance:

$49,500F + $44,880U = $4,620F
Direct-labor variances:
Rate variance:
Actual hours used x actual rate
20,900 hours x $339,625
$16.25.
20,900 hours x 292,600
$14.00.
Direct-labor rate $ 47,025
Efficiency variance:
20,900 hours x $292,600
$14.00.
Inc.
Standard hours allowed x standard
rate
24,700 hours* x 345,800
$14.00...
Direct-labor efficiency $ 53,200 Favorable
variance.
* 9,500 units x 2.6 hours
Total direct-labor variance:

$47,025U + $53,200F = $6,175F

Inc.
3. Yes. Although the combined variances are small, a more detailed analysis reveals
the presence of sizable, offsetting variances (all in excess of 12% of budgeted
cost amounts). A variance investigation should be undertaken if the likely benefits
of the investigation appear to exceed the costs.
4. No, things are not going as smoothly as the vice-president believes. With regard
to the new supplier, Santa Rosa is paying less than expected for direct materials.
However, the quality may be poor, as indicated by the unfavorable quantity
variance and increased usage.
Turning to direct labor, the favorable efficiency variance means that the
company is producing units by consuming fewer hours than expected. This may
be the result of the team-building/morale-boosting exercises, as a contented, well-
trained work force tends to be more efficient. However, another plausible
explanation could be that Santa Rosa is paying premium wages (as indicated by
the unfavorable rate variance) to hire laborers with above-average skill levels.
As a side note, the favorable direct-labor efficiency variance may partially

explain the unfavorable material quantity variance. That is, laborers may be
rushing through their jobs and using more material than the standards allow.
5. Yes. Schmidt is the production supervisor. The prices paid for materials and the
quality of material acquired are normally the responsibility of the purchasing
manager. The change to the new supplier may introduce problems of dealing with
the unknownthe suppliers reliability, ability to deliver quality goods, etc.
Finally, direct-labor wage rates are often a function of market conditions, which
would likely be uncontrollable from Schmidts perspective.

Inc.
1. a. Machine hours x 4 = standard direct-labor hours

165.5 x 4 = 662
b. Direct-labor efficiency variance = (AH-SH)SR

= (374-662)$15.08
= $4,343 F
2.
a. Standard b. 20% of the
Direct-Labor Standard Direct-
Cost* Labor Cost*
January.................................................... $ 9,983 $1,997
February.................................................. 6,050 1,210
March....................................................... 33,297 6,659
April......................................................... 43,056 8,611
May.......................................................... 9,651 1,930
June......................................................... 13,994 2,799
July.......................................................... 6,273 1,255
August..................................................... 5,791 1,158
September................................................ 5,791 1,158
October.................................................... 4,343 869
*Rounded.
3. The variances for all of the months except August and September exceed 20% of
the standard direct-labor cost and would therefore be investigated.

Inc.
4. Statistical control chart for direct-labor efficiency variances:
Favorable
variances
(in thousands)
$25
$20
$15
$10
1 standard
deviation
$5
Time
$0
Jan Feb Mar Apr May June July Aug Sept Oct
$5
1 standard
deviation
$10
$15
$20
$25
Unfavorable
variances
(in thousands)
Inc.
5. The variances for March, April, and June will be investigated, since they exceed
one standard deviation.
6. The production volume was much greater in March, April, and June.
1. Direct-material price = (PQ AP) (PQ SP)

variance
= $304,000 (160,000 $1.75)
= $304,000 $280,000
2. Direct-material quantity variance = SP(AQ SQ)

= $1.75(142,500 152,000*)
= $16,625 Favorable
*Standard quantity allowed = 19,000 units 8 lbs. per unit = 152,000 lbs.
3. Direct-labor rate = (AH AR) (AH SR)

variance
= $37,800* (5,000 $8.00)
= $2,200 Favorable
*90% $42,000 = $37,800
4. Direct-labor efficiency = SR(AH SH)

variance
= $8.00(5,000 4,750*)
*19,000 units .25 hour per unit = 4,750 hours

Inc.
1. a. Responsibility for setting standards:
Materials:
The development of standard prices for material is primarily the responsibility
of the materials manager.
Operating departmental managers and engineers should be involved in setting

standards for material quantities.
Labor:
The personnel manager or payroll manager would be involved in setting
standard labor rates.
Operating department managers with input from production supervisors and

engineers would be involved in setting standards for labor usage.
b. The factors that should be considered in establishing material standards

include the following:
Price studies, including expected general economic conditions, industry

prospects, demand for the materials, and market conditions.
Product specifications from descriptions, drawings, and blueprints.
Past records on raw-material cost, usage, waste, and scrap.

Factors in establishing labor standards:
Engineering studies of the time required to complete various tasks.
Learning.
Expected wage rates.
Expected labor mix (e.g., skilled versus unskilled).

Inc.
2. The basis for assignment of responsibility under a standard-costing system is

controllability. Judgments about whether departments or department managers are
performing efficiently should not be affected by items over which they have no
control.
The responsibility for a variance should be assigned to the department or

individual that has the greatest responsibility for deciding whether a specific cost
should be incurred. Some variances, however, are interdependent and
responsibility must be shared.
1. Variances (U denotes unfavorable; F denotes favorable):
a. Direct-labor rate variance for each labor class:
Labor Actual Standard Difference Actual Rate

Class Rate Rate in Rates Hours Variance
III $17.20 $16.00 $1.20 550 $ 660 U
II 15.00 14.00 1.00 650 650 U
I 10.80 10.00 .80 375 300 U
Total $1,610 U
b. Direct-labor efficiency variance for each labor class:
Labor Actual Standard Difference Standard Efficiency

Class Hours Hours* in Hours Rate Variance
III 550 500 50 $16.00 $ 800 U
II 650 500 150 14.00 2,100 U
I 375 500 (125) 10.00 (1,250) F
Total $1,650
U
*Given April's output of production.

Inc.
2. The advantages of not changing the labor rate would include (1) comparison of
actual operating results to a fixed base which was previously approved by
management, and (2) the clerical or computer cost savings of not implementing the
change. If labor standards are not changed during the year to incorporate
significant changes in labor costs, a noncontrollable variance is created. This
variance may mask actual operating variances. In addition, when reporting
operating variances that contain a significant noncontrollable variance, a credibility
gap may be created.
1. Standard cost per cutting board:
Direct material:
Lumber (1.5 board ft.* $3.00 per board ft.)......... $4.50
Footpads (4 pads $.05 per pad)......................... .20 $4.70
Direct labor:
Prepare and cut (14.4 /60 hr. $8.00 per hr.)........ $1.92
Assemble and finish (15/60 hr. $8.00 per hr.)..... 2.00 3.92
Total standard unit cost.............................................. $8.62
(5 1)
*1.25board ft. 1.5 board ft.
5
(5 1)

12 min. per board 14.4min.
5

Inc.
2. a. The role of the purchasing manager in the development of standards includes

establishing the standard cost for material required by the bill of materials,
determining if the company should take advantage of price reductions
available through economic order size, and obtaining data regarding the
availability of materials.
b. The role of the industrial engineer in the development of standards includes

preparing the bill of materials that specifies the types and quantities of
material required; establishing, in conjunction with the production supervisor,
any allowances for scrap, shrinkage, and waste; and participating in time
studies and test runs to facilitate the establishment of time standards.
c. The role of the managerial accountant in the development of standards

includes reviewing all information regarding material and labor standards
received from other departments, establishing the labor rate standards based
on the type of labor required, determining application rates for indirect costs
such as material handling and manufacturing overhead, and converting
physical standards such as hours and quantities to monetary equivalents.

Inc.
3. Ethical issues:
a. The purchasing manager, Smith, acted very unethically in purchasing off-

standard material for the cutting boards. It was clear that the material was not
well-suited for Ogwood's product. Smith placed his own annual bonus above
the best interests of the company.
b. When Rivkin, the controller, noticed the large, favorable price variance for the
wood, he acted ethically and responsibly to check out the circumstances.
c. When the controller failed to get a clear answer from the purchasing manager,
he acted ethically and responsibly in raising the issue with another qualified
individual. The production manager was a logical choice, since she would be
familiar with the type of materials necessary for the production process.
d. The controller should raise the entire issue with an individual in the company
who is at a high enough level to take appropriate action. Preferably, this
should be someone on a higher level in the organization than Smith, Rivkin, or
Wilcox. Ogwood may be able to cancel its order with the new supplier, even if
it means paying some sort of penalty.
The managerial accountant's ethical standards for objectivity require that the
controller, Rivkin, disclose what he knows about this unfortunate situation. These
standards are as follows:
Communicate information fairly and objectively.
Disclose fully all relevant information that could reasonably be expected to

influence an intended user's understanding of the reports, comments, and
recommendations presented.

Inc.
1. The standard cost per 10-gallon batch of strawberry jam is determined as follows:
Strawberries (7.5 qts.* $.80).................................... $ 6.00

Other ingredients (10 gal. $.45)............................... 4.50
Sorting labor (3/60 hr. 6 qt. $9.00)........................ 2.70
Blending labor (12/60 hr. $9.00).............................. 1.80
Packaging (40 qt. $.38).......................................... 15.20
Total standard cost per 10-gallon batch....................... $30.20
*6 quarts 5/4 = 7.5 qt., needed to produce 6 good quarts.

4 qt. per gal. 10 gal. = 40 qt.
2. Joe Adams behavior regarding the cost information is unethical because it

violates the following ethical standards:
Competence. Prepare complete and clear reports and recommendations after

appropriate analyses of relevant and reliable information.
Integrity. Avoid actual or apparent conflicts of interest and advise all

appropriate parties of any potential conflicts. Refrain from either actively or
passively subverting the attainment of the organizations legitimate and ethical
objectives. Refrain from engaging in or supporting any activity that would
discredit the profession.
Objectivity. Communicate information fairly and objectively.
3. a. In general, the purchasing manager is held responsible for unfavorable

material price variances. Causes of these variances include the following:
Failure to forecast price increases correctly.
Purchasing nonstandard or uneconomical lots.
Purchasing from suppliers other than those offering the most favorable
terms.

Inc.
b. In general, the production manager is held responsible for unfavorable labor

efficiency variances. Causes of these variances include the following:
Poorly trained labor.
Substandard or inefficient equipment.
Substandard material.
1. Variances to be investigated using rule of thumb:
Percentage of
Variance Type Month Amount Standard Cost
Efficiency...................... August.............. 38,000 U................ 7.60%
Efficiency...................... September........ 37,000 U................ 7.40%
Efficiency...................... October............. 42,000 U................ 8.40%
Efficiency...................... November......... 60,000 U................ 12.00
%
Efficiency...................... December......... 52,000 U................ 10.40
%
2. The company's direct-labor efficiency variances exhibit a consistent unfavorable

trend throughout the year. Beginning in January with an unfavorable variance of
$5,000, the variances gradually increase to unfavorable variances of $60,000 and
$52,000 in November and December, respectively.
When to investigate the trend in the variances is a judgment call. A reasonable

investigation point would be July, when the unfavorable trend has persisted for six
months and the variance is just under the $30,000 threshold value.
It would also be reasonable to investigate the direct-labor rate variance.

Although the variances are relatively small, they remain consistently favorable over
the eight-month period from May through December. Once again, this is a judgment
call.
3. It is important to follow up on favorable variances. A consistent pattern of favorable

variances, a favorable trend, or a large favorable variance may indicate that
employees have discovered a more efficient production method. Management
Inc.
should learn about such a development and may wish to implement the method
elsewhere in the company.
4. Statistical control chart: investigate August and October variances.
Favorable variances
$6,000

$3,000
Time
0

$3,000
$6,000
Unfavorable variances
Jan
McGraw-Hill/Irwin Feb Mar Apr May Jun Jul 2002
AugThe McGraw-Hill
Sept OctCompanies,
Nov Dec
Inc.
Memorandum
Date: Today
To: President, Pittsburgh Plastics Corporation
From: I. M. Student
Subject: Performance of North Hills Plant
1. The North Hills Plant's performance for the period January through June is
summarized as follows:
a. Production processing and productivity:
The plant's cycle time (or throughput time) has improved over the period
from 20 hours to 17 hours (average of 18.8 hours). This indicates that
the efficiency of the actual processing of products has improved.
Consistent with this observation is the reduction in setup time from 70 to
62 hours (average of 65.5). However, the plant's manufacturing cycle
efficiency has declined through the period, indicating that too much time
is being spent on inspection time, waiting time, and move time, relative
to actual processing time. Overtime hours have increased due to higher
demand late in the period. Power consumption has remained stable.
b. Product quality and customer acceptance:
The plant's quality control program appears to be paying off. The

number of defective units in finished goods declined dramatically, and
no products were returned. This is the result of the plant's inspectors
more effectively identifying defective units while still in process. Effort
should be devoted in the future to the reduction of the in-process
defective rate.
c. Delivery performance:
Delivery performance is good, but could be improved. All orders were

filled, but only an average of 95 percent of the orders were filled on time
in May and June. This probably reflects the increased demand, as
evidenced by the increase in overtime hours.

Inc.
problem 10-54 (continued)
d. Raw material, scrap and inventory:
The rate of defective raw materials has declined to zero. The purchasing
team is doing a good job by ensuring delivery of high-quality raw
materials. Inventory value has been steady through the period with an
average of 4.8 percent of sales. This is probably as low as can
reasonably be expected in this industry.
e. Machine maintenance:
Machine downtime improved during the period from 30 hours to 10 hours

(average of 21.7 hours), but bottleneck machine downtime was too high,
particularly in May. Also, unscheduled machine maintenance calls were
up in May and June.
2. Recommended actions:
a. Investigate the reasons behind the decline in manufacturing-cycle

efficiency. Concentrate on the elimination of non-value-added activities,
such as move time and wait time.
b. Maintain inspections in process. Try to reduce the in-process defective

rate by emphasizing the importance of quality to the work force.
c. Investigate causes of bottleneck machine downtime and correct the

situation.

Inc.
1. Categories of measures:
Area of
Manufacturing
Performance
Cycle time (days)............................................................ a
Number of defective finished products.............................. b
Manufacturing-cycle efficiency......................................... a
Customer complaints....................................................... c
Unresolved complaints.................................................... c
Products returned............................................................ b,c
Warranty claims.............................................................. b,c
In-process products rejected............................................ d
Aggregate productivity..................................................... a,e
Number of units produced per day per employee.............. a,e
Percentage of on-time deliveries...................................... f
Percentage of orders filled............................................... f
Inventory value/sales revenue......................................... g,h
Machine downtime (minutes)........................................... i
Bottleneck machine downtime (minutes)........................... i
Overtime (minutes) per employee.................................... a,e
Average setup time (minutes).......................................... a

Inc.
2. Memorandum
Date: Today
To: Management, MedTech, Inc.
From: I. M. Student
Subject: Performance of Harrisburg plant during 1st quarter
The performance of the Harrisburg plant is evaluated in nine key areas:
a. Production processing:
Cycle time, manufacturing-cycle efficiency, and productivity measures all

point to consistency and high-level performance throughout the
measurement period. Both cycle time and manufacturing-cycle efficiency
exhibit slight, favorable trends.
b. Product quality:
The number of defective finished products, number of products returned,

and warranty claims all show improvement over the period. All three
measures suggest excellent performance in quality control.
c. Customer acceptance:
Customer complaints are steady with an average of 6.5 complaints during a

two-week period. The number of unresolved complaints improved during the
period from 2 to 0. Performance in this area is very high, but there is a little
room for improvement.
d. In-process quality control:
The number of products rejected in process has increased. This speaks well
for the in-process inspection effort. The cause of these defective in-process
units should be investigated and corrected.

Inc.
e. Productivity:
Both the aggregate productivity measure and the number of units produced
per day per employee remained relatively steady throughout the period. The
latter of these two measures exhibited a slight, favorable trend.
f. Delivery performance:
Both performance measures (percentages of on-time deliveries and orders

filled) were very high through the period, finishing at 100 percent in period
6.
g. & h. Raw material and scrap; inventory:
Inventory value/sales revenue remained consistently low through the period

(average of 1.83 percent).
i. Machine maintenance:
Machine downtime was low through the period (average of 84 minutes each
two-week period). Bottleneck machine downtime was low except in period 5.
The cause of that incident should be investigated.
Overall evaluation:
The Harrisburg plant has performed at a very high level of efficiency in virtually
every phase of its operations during the 1st quarter.

Inc.
1. a. The semiannual installments and total bonus for the Charter Division are
calculated as follows:
CHARTER DIVISION
GAIN-SHARING BONUS CALCULATION
FOR THE YEAR ENDED DECEMBER 31, 20X1
First installment, JanuaryJune:
Profitability (.02 $462,000).......................... $ 9,240

Rework [(.02 $462,000) $11,500].............. (2,260)
On-time delivery (no bonusunder 96%)........ -0-
Sales returns
{[(.015 $4,200,000) $84,000] 50%}.. (10,500)
Semiannual installment.................................. $ (3,520)
First semiannual bonus awarded........................ $0
Second installment, JulyDecember:
Profitability (.02 $440,000).......................... $ 8,800

Rework [(.02 $440,000) $11,000].............. (2,200)
On-time delivery (96%98%).......................... 2,000
Sales returns
{[(.015 $4,400,000) $70,000] 50%}.. (2,000)
Semiannual installment.................................. $ 6,600
Second semiannual bonus awarded.................... 6,600
Total bonus awarded for the year........................ $6,600
b. The employees of the Charter Division are likely to be frustrated by the new
plan, since the division bonus is more than $20,000 less than that of the
previous year, when sales and operating income were similar. However, both
on-time deliveries and sales returns improved in the second half of the year,
while rework costs were relatively even. If the division continues to improve at
the same rate, the Charter Division bonus will approximate or exceed what it
was under the old plan. The only open question is whether the employees
have sufficient motivation to effect improvement.

Inc.
2. a. The semiannual installments and total bonus for the Mesa Division are
calculated as follows:
MESA DIVISION
GAIN-SHARING BONUS CALCULATION
FOR THE YEAR ENDED DECEMBER 31, 20X1
First installment, JanuaryJune:
Profitability (.02 $342,000).......................... $6,840

Rework [(.02 $342,000) $6,000]................ -0-*
On-time delivery (over 98%)........................... 5,000
Sales returns
{[(.015 $2,850,000) $44,750] 50%}. . (1,000)
Semiannual installment.................................. $10,840
First semiannual bonus awarded........................ $10,840
Second installment, July-December:
Profitability (.02 $406,000).......................... $8,120

Rework [(.02 $406,000) $8,000]................ -0-*
On-time delivery (no bonusunder 96%)........ -0-
Sales returns
{[(.015 $2,900,000) $42,500] 50%}. . 3,000
Semiannual installment.................................. $11,120
Second semiannual bonus awarded.................... 11,120
Total bonus awarded for the year........................ $21,960
*Rework costs not in excess of 2 percent of operating income.

$3,000, since sales returns are less than 1.5 percent of sales.
b. The employees of the Mesa Division should be as satisfied with the new plan
as with the old plan, because the bonus was almost equivalent. However,
there is no sign of improvements in this division; in fact, on-time deliveries
declined considerably in the second half of the year. Therefore, the bonus
situation may not be as favorable in the future. Decreased bonuses could
motivate the employees to improve, or they could frustrate employees and
undermine their motivation.

Inc.
3. Harrington's revised bonus plan for the Charter Division fostered improvements
including the following:
Increase of 1.9 percent in on-time deliveries
$500 reduction in rework costs
$14,000 reduction in sales returns

However, operating income as a percentage of sales has decreased from 11 to 10
percent.
The Mesa Division's bonus has remained at the status quo. The effects of the
revised plan at MedLine Equipment Corporation have been offset by the following:
Increase of 2 percent in operating income as a percentage of sales (from 12 to

14 percent)
Decrease of 3.6 percent in on-time deliveries
$2,000 increase in rework costs
$2,250 decrease in sales returns

These results suggest that the gain-sharing bonus plan needs revisions.
Suggestions include the following:
Creating a reward structure for rework costs that are below 2 percent of
operating income that would encourage employees to drive costs lower.
Reviewing the whole year in total. The bonus plan should carry forward the
negative amounts for one six-month period into the next six-month period,
incorporating the entire year when calculating a bonus.
Developing benchmarks, and then giving rewards for improvements over prior
periods and encouraging continuous improvement.

Inc.
1. a. Direct-labor rate variance = (AH AR) (AH SR)

= (36,500 $8.24*) (36,500 $8.20)
*$300,760 36,500 hours
b. Direct-labor efficiency = (AH SR) (SH SR)

variance
= (36,500 $8.20) (37,200* $8.20)
= $5,740 Favorable
*Standard allowed direct-labor hours:
Completed units............. 5,600 units 6 hours per unit 33,600 hours

Partially completed
units........................... 800 units 75% 6 hours per 3,600 hours
unit
Total standard
hours allowed............. 37,200 hours
c. Actual quantity of material used:
Direct-material quantity = (AQ SP) (SQ SP)

variance
= ( AQ $5.00) (51,200* $5.00)
Therefore: $5( AQ 51,200) = $1,500
AQ 51,200 = 300
AQ = 51,500 kilograms
*Standard quantity of material allowed:
Completed units................ 5,600 units 8 kilograms 44,800 kilograms

Partially completed
units.............................. 800 units 8 kilograms 6,400 kilograms
Total standard
quantity allowed............ 51,200 kilograms
Inc.
Inc.
d. Actual price paid per kilogram of direct material:
Actual price = $249,250/50,000

= $4.985 per kilogram
e. Direct-material and direct-labor cost transferred to finished goods:
Direct-material
cost transferred................................... 5,600 units $40 $224,000
Direct-labor
cost transferred................................... 5,600 units 275,520
$49.20
Total cost transferred.............................. $499,520
f. Direct-material and direct-labor cost in November 30 balance of Work-in-

Process Inventory:
800 units $40 per unit

Direct material.............................................. $32,000
800 units 75%
Direct labor................................................... 29,520
$49.20
Total cost in ending
Work-in-Process Inventory......................... $61,520

Inc.
2. Raw-Material Inventory............................................... 250,000

Direct-Material Price Variance............................ 750*
Accounts Payable.............................................. 249,250
*Direct-material price = PQ(AP SP)

variance
= 50,000($4.985 $5.00) = $750 Favorable
To record the purchase of raw material and the direct-material price variance.
Work-in-Process Inventory.......................................... 256,000*

Raw-Material Inventory...................................... 257,500
*51,200 $5.00 = $256,000

51,500 $5.00 = $257,500
To add the direct-material cost to work in process and record the direct-material
quantity variance.

Direct-Labor Efficiency Variance........................ 5,740
Wages Payable................................................. 300,760
*37,200 $8.20 = $305,040

To add the direct-labor cost to work-in-process, record the direct-labor rate and
efficiency variances, and recognize the actual direct-labor cost.

Inc.
1. (a) Direct-material price variance = PQ(AP SP)
Calculation Price
Product PQ(AP SP) Variance
Standard tent............... 2,100 ($6.40* $6)........................ $840 U
Deluxe tent................... 800 ($7.90 $8)............................ 80 F
Direct-material
price variance...................................................................... $760 U
*$6.40 = $13,440 2,100

$7.90 = $6,320 800
(b) Direct-material quantity variance = SP(AQ SQ)
Calculation Quantity
Product SP(AQ SQ) Variance
Standard tent.............. $6 (1,250 1,200*).......................... $300 U
Deluxe tent................. $8 (720 720 )................................ -0-
Direct-material
quantity variance.................................................................. $300 U
*1,200 = 100 tents 12 lbs. per tent

720 = 120 tents 6 lbs. per tent

Inc.
problem 10-58 (continued)
2. Raw-Material Inventory........................................ 19,000*

Direct-Material Price Variance............................. 760
Accounts Payable....................................... 19,760
To record purchase of tent fabrics.
*$19,000 = (2,100 lbs. $6 per lb.) + (800 lbs. $8 per lb.)
Work-in-Process Inventory................................... 12,960*

Direct-Material Quantity Variance......................... 300
Raw-Material Inventory............................... 13,260
To record use of direct material.
*$12,960 = (1,200 lbs. $6 per lb.) + (720 lbs. $8 per lb.)

$13,260 = (1,250 lbs. $6 per lb.) + (720 lbs. $8 per lb.)

Inc.
1. Standard cost schedule:
DIRECT MATERIAL
Construction Finishing
Department Department
Standard quantity
Direct material and parts in finished
product:
Veneered wood................................. 7 lbs
Bridge and strings............................. 1 set
Allowance for normal waste................... 1 lb
Total standard quantity per guitar.............. 8 lbs 1 set
Standard price:
Direct material and parts:
Veneered wood................................. $12 per lb
Bridge and strings............................. $15 per set
Standard direct-material cost:

Standard quantity................................. 8 lbs 1 set
Standard price...................................... $12 per lb $15 per set
Standard cost per guitar........................ $96 per guitar $15 per guitar
Actual output in July............................. 500 guitars 500 guitars
Total standard cost of direct material
in July.................................................. $48,000 $7,500
DIRECT LABOR
Construction Finishing
Department Department
Standard direct-labor cost:
Standard quantity................................. 6 hrs 3 hrs
Standard rate....................................... $ 20 $15

Standard cost per guitar........................ $120 $45
Actual output in July............................. 500 guitars 500 guitars
Total standard cost of direct labor
in July.................................................. $60,000 $22,500

Inc.
2. (a) Construction Department:

COST COST
6,000 $12.50 6,000 $12.00 4,000 $12.00
pounds per pounds per pounds per
purchased pound purchased pound allowed pound
$75,000 $72,000 $48,000
$3,000 Unfavorable
Direct-material 4,500 $12.00
price variance pounds per
used pound
$54,000
$6,000
Unfavorable
Direct-
material
quantity
variance

Inc.

2,850 $19 2,850 $20 3,000 $20
$54,150 $57,000 $60,000
$2,850 Favorable $3,000 Favorable

$5,850 Favorable
(b) Finishing Department:

1,570 $16 1,570 $15 1,500 $15
$25,120 $23,550 $22,500
$1,570 Unfavorable $1,050 Unfavorable

$2,620 Unfavorable

Inc.
3. Cost variance report:
SPRINGSTEEN COMPANY
COST VARIANCE REPORT
FOR THE MONTH OF JULY
Construction Department Finishing Department

Percentage of Percentage of
Amount Standard Amount Standard Cost
Cost
Direct material:
Standard cost, given
actual output............ $48,000 $ 7,500
Direct-material price
variance................... 3,000 U 6.25% -0- -0-
Direct-material quantity
variance................... 6,000 U 12.50% -0- -0-
Direct labor:
Standard cost, given
actual output............ $60,000 $22,500
Direct-labor rate 2,850 F 4.75% 1,570 U 6.98%
variance
Direct-labor efficiency
variance................... 3,000 F 5.00% 1,050 U 4.67%

Inc.
1. Journal entries:

To record purchase of veneered wood.

To record purchase of bridges and strings.
Work-in-Process Inventory.......................................... 48,000

Raw-material Inventory...................................... 54,000
To record usage of veneered wood.

Raw-Material Inventory...................................... 7,500
To record usage of bridges and strings.

Direct-Labor Rate Variance................................ 2,850
Direct-Labor Efficiency Variance........................ 3,000
Wages Payable................................................. 54,150
To record Construction Department direct-labor costs and variances.

Wages Payable................................................. 25,120
To record Finishing Department direct-labor costs and variances.

Inc.
Finished-Goods Inventory........................................... 138,000

Work-in-Process Inventory................................. 138,000
To record completion of 500 guitars at a standard cost of $276 each

($276 = $96 + $15 + $120 + $45).
Accounts Receivable.................................................. 120,000

Sales Revenue.................................................. 120,000
Cost of Goods Sold 82,800

Finished-Goods Inventory.................................. 82,800
To record sale of 300 guitars at a price of $400 each and a standard cost of $276
each.
Cost of Goods Sold.................................................... 5,770

Direct-Labor Rate Variance......................................... 1,280*
Direct-Material Price Variance............................ 3,000
Direct-Material Quantity Variance....................... 6,000
To close variances into Cost of Goods Sold.
*Sum of direct-labor rate variances: $1,280 F = $2,850 F + $1,570 U

Sum of direct-labor efficiency variances: $1,950 F = $3,000 F + $1,050 U

Inc.
2. Posting of journal entries:
Raw-Material Inventory Accounts Receivable

72,000 54,000 120,000
9,000 7,500
Work-in-Process Inventory Accounts Payable

48,000 138,000 75,000
7,500 9,000
60,000
22,500
Finished-Goods Inventory Wages Payable

138,000 82,800 54,150
25,120
Cost of Goods Sold Sales Revenue

82,800 120,000
5,770
Direct-Material Price Direct-Labor Rate Variance

Variance
3,000 3,000 1,570 2,850
1,280
Direct-Material Direct-Labor
Quantity Variance Efficiency Variance
6,000 6,000 1,050 3,000
1,950

Inc.
SOLUTIONS TO CASES
CASE 10-61 (60 MINUTES)
1. Standard cost of lots 22, 23, and 24:
EUROPEAN STYLES, INC.

STANDARD COST OF PRODUCTION
FOR NOVEMBER
Standard Total
Quantity Cost per Standard
Lot (boxes) Box Cost
22.......................................................... 1,000 $106.50 $106,500
23.......................................................... 1,700 106.50 181,050
24.......................................................... 1,200 90.48* 108,576
Standard cost of production $396,126
*Standard material cost plus 80 percent of standard cost of labor and overhead:
$26.40 + (80%)($44.10 + $36.00).
2. Variances (U denotes unfavorable; F denotes favorable):

DIRECT-MATERIAL PRICE VARIANCE
FOR NOVEMBER
Actual cost of materials purchased................................................. $106,40

0
Standard cost of materials purchased
(95,000 $1.10)........................................................................ 104,50
0
Direct-material price variance........................................................ $ U
1,900

Inc.
CASE 10-61 (CONTINUED)

DIRECT-MATERIAL AND DIRECT-LABOR VARIANCES
FOR NOVEMBER
Lot no.
22 23 24 Total
Direct-material quantity
variance:
Standard yards:
Units in lot......................... 1,000 1,700 1,200 3,900
Standard yards
per lot.......................... 24 24 24 24
Total standard
quantity........................ 24,000 40,800 28,800 93,600
Actual yards used................ 24,100 40,440 28,825 93,365
Variance in yards*................... 100 (360) 25 (235)
Standard price......................... $1.10 $1.10 $1.10 $1.10
Direct-material
quantity variance............... $ 110 U $ (396) F $27.50 U $(258.50) F
*Parentheses denote favorable variance.
Lot no.
22 23 24 Total
Direct-labor efficiency variance:
Standard hours:
Units in lot.......................... 1,000 1,700 1,200
Standard hours
per lot......................... 3 3 3
Total.................................. 3,000 5,100 3,600
Percentage of completion. . . 100% 100% 80%
Total standard hours........... 3,000 5,100 2,880 10,980
Actual hours worked........... 2,980 5,130 2,890 11,000
Variance in hours*.................. (20) 30 10 20
Standard rate......................... $14.70 $14.7 $14.7 $14.70
0 0
Direct-labor
efficiency variance........... $ (294) F $441 U $147 U $294 U
*Parentheses denote favorable variance.

Inc.
Lot no.
22 23 24 Total
Direct-labor rate variance:
Actual hours worked........... 2,980 5,130 2,890 11,000
Rate paid in excess of
standard $ . $ . $ .30 $ .30
($15.00 $14.70)........... 30 30
Variance............................... $ 894 U $1,539 U $ 867 U $ 3,300 U
3. Journal entries:
Raw-material Inventory............................................... 104,500*

*95,000 $1.10 = $104,500
To record the purchase of raw material.

Direct-Material Quantity Variance....................... 258.50
Raw-Material Inventory...................................... 102,701.50
*93,600 $1.10 = $102,960
To add direct-material cost to work-in-process inventory and record the direct-

material quantity variance.

Direct-Labor Efficiency Variance................................. 294
Wages Payable................................................. 165,000
*10,980 $14.70 = $161,406
To add direct-labor cost to work-in-process inventory, record the direct-labor

variances, and record the incurrence of direct-labor cost.

Inc.
CASE 10-62 (75 MINUTES)
The completed list is shown below. Begin by filling in the facts you know. The reasoning
used to reduce the remaining data is explained after the list of answers.
1. Actual output (in drums)
standard quantity of direct material A allowed, given actual output

= standard quanity of direct material A per drum
10,000lb.
1,000drums
= 10 lb. per drum
2.
Direct material A B
a. Standard quantity per drum................................. 10 lb. 5 gal. a
b. Standard price.................................................... $5.00/lb. $3.00/gal. b
c. Standard cost per drum....................................... $50.00 c $15.00
d. Standard quantity allowed, given actual output..... 10,000 lb. 5,000 gal.
e. Actual quantity purchased................................... 12,000 lb. 6,000 gal.
f. Actual price......................................................... $4.50/lb. $3.20/gal. d
g. Actual quantity used............................................ 10,500 lb. e 4,800 gal.
h. Price variance..................................................... $6,000 F f $1,200 U
i. Quantity variance................................................ $2,500 U $600 F g
a
Standard quantity of direct material B per drum
standard quantity of direct materialB allowed, given actual output
= actual output
5,000gal.
= 1,000drums 5 gal.
standard cost of materialB per drum
b
Standard price of direct material B = standard quantity allowed per drum
$15.00per drum
$3.00per gal.
= 5 gal. per drum

Inc.
c
Standard cost of direct material A per drum = 10 lbs. $5.00 per lb. = $50.00.
d
The reasoning for the actual price of direct material B is as follows, where the
subscripts denote materials A and B:
Increase in actual cost of = (PQ A AP A) + (PQ B AP B)

accounts payable = material
purchases
$73,200 = (12,000 $4.50 ) + (6,000 AP B)
AP B = $3.20 per gallon
e
This conclusion comes from the following formula for the quantity variance:
Quantity variance (A) = SP(AQ SQ)
$2,500 U = ( AQ 10,000)
$5.00
AQ = 10,500 lb.
f
Direct material A price = PQ (AP SP)
variance
= 12,000 ($4.50 $5.00)
= $6,000 F
g
Direct material B quantity = SP(AQ SQ)
variance
= $3.00 (s4,800 5,000)
= $600 F

Inc.
3.
I II
Direct labor: (mixers) (packers)
a. Standard hours per drum..................................... 2 hr. a 4 hr.
b. Standard rate per hour........................................ $15.00 $12.00 b
c. Standard cost per drum....................................... $30.00 $48.00
d. Standard quantity allowed, given actual output..... 2,000 hr. c 4,000 hr. d
e. Actual rate per hour............................................ $15.30 e $11.90
f. Actual hours........................................................ 2,000 hr f 4,100 hr. g
g. Rate variance...................................................... $600 U $410 F h
h. Efficiency variance.............................................. -0- i $1,200 U
a
Standard hours of direct labor type I per drum
standard cost of direct labor I per drum
= standard rate per hour
$30.00per drum
2 hr .
= $15.00per hr.
b
Direct labor type II, standard rate per hour
standard cost of direct labor type II per drum
= standard hours per drum
$48.00per drum
$12.00
= 4 hr. per drum
c
Direct labor type I, standard quantity allowed, given actual output
= 1,000 drums 2 hr. per drum
= 2,000 hr.
d
Direct labor type II, standard quantity allowed given actual output
= 1,000 drums 4 hr. per drum
= 4,000 hr.

Inc.
e
Direct labor type I, actual rate per hour = $15.30. Use the formula for the direct-
labor rate variance as follows:
$600 U = 2,000 ( AR $15.00)
AR = $15.30
f
Direct labor type I, actual hours = 2,000 hr. Since there was no labor type I
efficiency variance, actual hours and standard hours are equal.
g
Direct labor type II, actual hours = 4,100 hr. Use the formula for the direct-labor
efficiency variance, as follows:
Direct-labor (II) efficiency variance = SR (AH SH)
$1,200 U = $12.00 ( AH 4,000)
AH = 4,100 hr.
h
Direct-labor type II, rate variance = AH (AR SR)
= 4,100 ($11.90 $12.00)
= $410 F

Inc.
i
Direct labor type I, efficiency variance = zero.
Just fill in the remaining variance in the following tabulation:
Direct-material variances:
A: Price variance........................................................................ $6,000 F
A: Quantity variance................................................................... 2,500 U
B: Price variance........................................................................ 1,200 U
B: Quantity variance................................................................... 600 F
Direct-labor variances:
I: Rate variance......................................................................... 600 U
I: Efficiency variance................................................................. ?
II: Rate variance......................................................................... 410 F
II: Efficiency variance................................................................. 1,200 U
Total (favorable variance because of credit to cost of Goods Sold) . . . $1,510 F
Therefore, the direct-labor type I efficiency variance = $1,510 $6,000 + $2,500

+ $1,200 $600 + $600 $410 + $1,200 = 0
4. Total of all variances for the month: $1,510 F (favorable because of credit to Cost
of Goods Sold).

Inc.
CURRENT ISSUES IN MANAGERIAL ACCOUNTING
ISSUE 10-63
"U.S AUTO MAKERS TO REV UP OUTPUT OF 'HYBRID' VEHICLES," THE WALL

STREET JOURNAL , OCTOBER 24, 2000, JEFFREY BALL.
1. Hybrids boost fuel economy by adding an electric motor to a traditional internal
combustion engine.
2. Developing standards for a radically new product is difficult at best.

Manufacturers generally try to find aspects of the new product (and the processes
needed to produce it) that are similar to products and processes with which they
have experience. Initial standards then can be inferred from these more familiar
products and processes. Also, using a target price analysis would allow auto
makers to determine what price consumers would pay for a hybrid vehicle. The
auto makers could then work backwards toward reducing their costs in order to
make an economically viable product.
ISSUE 10-64
"CAN YAHOO! THRIVE IN A HARSH CLIMATE," THE WALL STREET JOURNAL ,

OCTOBER 16, 2000.
1. Yahoo is an online business that provides many free services.
2. Yahoo offers search capabilities, an auction, classifieds, travel information, mail,

photos, chat rooms, clubs and a myriad of other services.
3. The article questions whether Yahoo will be innovative enough to be competitive

as the Internet business environment evolves over time. Innovation and learning
is one of the four major areas covered by the balanced scorecard. Management
could use the balanced scorecard to put a spotlight on this area of critical
importance to the company.

Inc.

Standard Costing and Performance Measures For Today's Manufacturing Environment

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CHAPTER 10

Standard Costing and Performance Measures for

ANSWERS TO REVIEW QUESTIONS

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,

10-9 An unfavorable direct-material quantity variance means that a larger amount of

The direct-material quantity variance is based on the amount of material used

10-14 The interpretation of an unfavorable direct-labor efficiency variance is that more

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,

10-18 Several ways in which standard-costing should be adapted in the new

(a) Reduced importance of labor standards and variances: As direct labor

(b) Emphasis on material and overhead costs: As labor diminishes in its

(f) Non-value-added costs: A key objective of a cost management system is the

10-20 Advantages of a standard-costing system include the following:

(b) Computation of standard costs and cost variances enables managers to

(c) Variances provide a means of performance evaluation and rewards for

(f) A standard-costing system usually is less expensive than an actual- or normal-

(a) Raw material and scrap

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,

(d) Product quality

(e) Production and delivery

(g) Innovation and learning

10-23 Examples of customer-acceptance measures include the number of customer

10-24 An aggregate productivity measure is defined as total output divided by total

(a) Variances are too aggregate and too late to be useful.

(c) Standard-costing systems focus too much on direct labor.

(g) Traditional standard-costing systems tend to focus too much on cost

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,

Financial: (a) profit; (b) cost of back-office (i.e., administrative) operations.

Internal operations: (a) number of transaction errors; (b) employee retention

Customer: (a) local market share; (b) number of repeat customers.

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,

Direct-material price variance = PQ(AP SP)

Direct-material quantity = SP(AQ SQ)

* SQ = 200,000 kilograms = 50,000 units 4 kilograms per unit

Direct-labor rate variance = AH(AR SR)

* AR = $211,900 13,000 hours

Direct-labor efficiency variance = SR(AH SH)

* SH = 12,500 hours = 50,000 units .25 hours per unit

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,

DIRECT-MATERIAL PRICE AND QUANTITY VARIANCES

ACTUAL MATERIAL STANDARD MATERIAL

$194,400 $192,000 $160,000

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,

DIRECT-LABOR RATE AND EFFICIENCY VARIANCES

ACTUAL LABOR COST STANDARD LABOR COST

$211,900 $208,000 $200,000

$3,900 Unfavorable $8,000 Unfavorable

EXERCISE 10-30 (10 MINUTES)

EXERCISE 10-31 (10 MINUTES)

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,

Standard direct-material cost of a jewelry box:

EXERCISE 10-32 (15 MINUTES)

Direct-material price variance = PQ(AP SP)

Direct-material quantity variance = SP(AQ SQ)

* AQ = 4,200 pounds = $30,660 $7.30 per pound

SQ = 4,000 pounds = 2,000 units 2 pounds per unit

Direct-labor rate variance = AH(AR SR)

* AH = 6,450 hours = $116,745 $18.10 per hour

Direct-labor efficiency variance = SR(AH SH)

* SH = 6,000 hours = 2,000 units 3 hours per unit

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,

DIRECT-MATERIAL PRICE AND QUANTITY VARIANCES

ACTUAL MATERIAL STANDARD MATERIAL